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In Search of Cash, World’s Aerospace Industry Orients Toward Asia

November 21, 1991

TOKYO (AP) _ The world’s largest aircraft makers, hard-pressed for cash for developing high-tech planes, are increasingly seeking out Asian partners to keep their competitive edge.

The clearest evidence came late Tuesday, when defense contracter McDonnell Douglas Corp. announced from its St. Louis headquarters a $2 billion preliminary agreement to sell 40 percent of its commercial aircraft manufacturing operations to a Taiwan-led investor group.

The world’s two other leading jet makers, European consortium Airbus Industries and Boeing Co. of Seattle, Wash., also have been courting broader business links with Asia.

Western aircraft makers have long farmed a portion of manufacturing operations out to plants in Asia, where production costs are lower than at home. McDonnell Douglas has estimated that manufacturing costs in Taiwan are about 20 percent lower than in the United States.

But the need for cost-cutting has intensified amid ballooning development expenses. This has benefited fast-growing Asian carriers, often government- affiliated businesses that link aircraft sales to local production.

For cash-short McDonnell Douglas, the chief advantage of its marriage of convenience appears to be Taiwan’s more than $76 billion in foreign reserves. The U.S. defense manufacturer needs cash to launch its new long-range, wide- body MD-12 airliner.

″The development cost for a new aircraft now is so enormous it simply is not prudent to mortgage a company’s future,″ said Steve Marvin, an industry analyst at Jardine Fleming Securities. ″It just makes sense to diversify your risk.″

McDonnell Douglas’ new partner, Taiwan Aerospace Corp., is not the only Asian firm jumping into the fray.

McDonnell Douglas says it also approached South Korea aircraft makers about its wide-body jet project.

Trading firm Mitsui and Co. in Tokyo denies reports that it also had been offered an equity share in McDonnell Douglas. But company spokesman Hidemi Mori said Mitsui, the aircraft maker’s sole agent in Japan, may get involved in leasing and marketing the MD-12 as it has the MD-11.

For its part, Airbus Industries has approached Japanese aircraft makers about a stake in the development of a huge, supersonic jet able to seat 600-800 passengers.

Mitsubishi Heavy Industries spokesman Junichiro Yamada said his company had not yet received a formal invitation to get involved in the project, but that Mitsubishi’s ties to Boeing would make participation unlikely.

Mitsubishi is one of several Japanese manufacturers working with Boeing on the 777 wide-body jet. Japanese partners have a 21 percent share in development and production of that jet.

In addition to cash, Asia can supply aircraft makers with the latest electronics and new materials technology, Marvin said.

Aerospace is one of the few remaining high-tech areas in which Asia lags well behind the West, and both Taiwan and Japan have made developing domestic aircraft industries a national priority.

Yang Shih-chien, director general of the Industrial Development Bureau of Taiwan, said the government believes the deal with McDonnell Douglas will help the nation churn out $2 billion to $5 billion in annual aerospace production.

However, analysts caution that such deals are not likely to immediately push Asia to the forefront of the industry.

″But in the aviation industry, you never know what you might be able to use for commercial spinoffs, and a foothold in a crucial industry will probably benefit them in the long run,″ Marvin said.

The preliminary deal announced by McDonnell Douglas would set up new U.S. and Taiwan operations to produce MD-12s. Final assembly would be in the United States.

The trend could mean a partial rebirth of Japan’s pre-war aerospace strength. The Japanese aircraft industry that produced Zero fighters for World War II was dissolved after Japan’s defeat and has never fully recovered.

Military planes are made in Japan under foreign license, but the country has never produced a commercial airliner. Its only attempt so far, the YS-11 turbo prop, was a flop. Foreign interest in other passenger jet projects has been lukewarm.